How to Invest in Wearable Technology
Adam is a member of The Motley Fool Blog Network -- entries represent the personal opinion of the blogger and are not formally edited.
The shift from computers to mobile devices is still a work in progress, and now the internet is buzzing with hype over the next big step in computing – wearable technology.
Big companies are already stepping up with products like Nike’s Fuelband or UnderArmour’s Armour39 to complement already popular wearable fitness devices such as the Fitbit or Garmin’s Forerunner. Next, we’ll see Google release its much-anticipated Glass product, and there’s a ridiculous amount of hype over the idea that Apple is working on a watch.
With the proliferation of new wearable technologies just beginning, I’m not going to make any conjectures over which product consumers will flock to. However, I do believe this is another great opportunity for several companies that manufacture the chief components of wearable technology.
Every computer, no matter how big or small, draws upon a set of microchips. As devices get smaller and designers create more interactive products, form factor and power consumption become increasingly important.
Qualcomm (NASDAQ: QCOM) has had tremendous success in recent years as its chips find their way into Apple, Samsung, Sony, and Google products. While the company is well established as a high-end chipmaker for smartphones and tablets, a watch might require something less expensive to keep the price down.
Recently, the company broadened its portfolio of mobile chipsets to include two new entry-level families in an effort to target low-end smartphones in emerging markets. This is part of an effort to stave off growing competition from Broadcom (NASDAQ: BRCM), which has established close ties to Apple and lower-end Samsung products.
However, Intel (NASDAQ: INTC) started producing industry leading 22nm chipsets last year, and is moving to 14nm this year. 22nm chips are about one-half the size (in surface area) of 28nm-32nm chips from Qualcomm or Broadcom. That means Intel can produce chips for about half the cost, and when it starts producing 14nm chips the costs will drop further. Aside from cost advantages, smaller chips are also more power efficient.
A broader approach
For a broader focus on chipmakers, investors may look to ARM Holdings (NASDAQ: ARMH), which has taken the fabless approach and only makes chip designs. While the company doesn’t actually manufacture chips, it’s the designer behind many of the most popular energy-efficient chipsets made by companies like Qualcomm and Broadcom. Its designs are also used as the basis for many other popular mobile chipsets from NVIDIA.
Yet another option is to take advantage of the proliferation of fabless chip designers through investment in a foundry such as Taiwan Semiconductor Manufacturing (NYSE: TSM). The company owned nearly half of the chip foundry market in 2011, and practically has a monopoly on the 28nm fabrication market. Market share ought to continue to grow across the board, and it may be the beneficiary of the long-awaited split between Apple and Samsung.
Finally, if you want to go even broader, you can invest in an ETF focused on semiconductor technologies. The SPDR S&P Semiconductor ETF (XSD) offers a highly diversified and less concentrated fund compared to other options. The Market Vectors Semiconductor ETF (SMH) offers a more concentrated mix, investing nearly one-third of assets in Intel and Taiwan Semiconductor. Of course, you can always make your own fund by buying the companies you like best.
Determining which company will make the best new wearable computer is practically impossible. Buying stock in any company based on the belief that their product will beat out everyone else’s feels more like gambling than investing to me.
While semiconductors had a tough year in 2012, it is the industry that stands to benefit most from an increasing number of tiny little computers these companies plan on selling.
adamlevy has no position in any stocks mentioned. The Motley Fool recommends Intel. The Motley Fool owns shares of Intel and Qualcomm. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy. Is this post wrong? Click here. Think you can do better? Join us and write your own!